Patteson v. McAdams Tax Advisory Group, LLC et al

Filing 30

ORDER DISMISSING CASE SUA SPONTE FOR LACK OF SUBJECT MATTER JURISDICTION. Signed by Judge Samuel H. Mays, Jr., on February 24, 2010. (Mays, Samuel)

IN THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF TENNESSEE WESTERN DIVISION DAVID PATTESON, Plaintiff, v. McADAMS TAX ADVISORY GROUP, LLC; GREGORY GIBSON; ALLIANZ LIFE INSURANCE CO. OF NORTH AMERICA; GENWORTH FINANCIAL TRUST CO.; INVESTORS CAPITAL CORP.; and other Unknown Individuals, Defendants. ) ) ) ) ) ) ) ) ) ) ) ) ) )

Case No. 09-2085

ORDER DISMISSING CASE SUA SPONTE FOR LACK OF SUBJECT MATTER JURISDICTION

Plaintiff McAdams Insurance Financial Corporation Tax

David Advisory of

Patteson Group, North

filed LLC

suit

against

Defendants Life

("McAdams");

Allianz

Company Trust

America

("Allianz"); Investors Gibson;

Genworth Capital and other

Company

("Genworth"); Gregory

("Investors

Capital");

unknown individuals, alleging that they, acting together, caused him to invest his retirement funds in an annuity that did not meet his stated investment goals. Defendants McAdams, Investors

Capital, and Gregory Gibson filed a Motion to Compel Arbitration on July 7, 2009, which this Court has referred to Magistrate Judge Tu M. Pham for Report and Recommendation. (See Dkt. No.

8.)

Defendant Allianz Life Insurance Company of North America (See Dkt.

filed a separate Motion to Dismiss on July 9, 2009. No. 9.)

Plaintiff alleges that the Court has both diversity and (Compl. at 2-3.)

federal question jurisdiction over his suit.

Because the Court has determined that it has neither, the Court DISMISSES Patteson's suit for lack of subject matter

jurisdiction. I. BACKGROUND alleges that in March 2007 he received a

Patteson

solicitation from Gibson and McAdams advertising reduced-cost tax preparation services. (Id. ¶ 1.) As a retired individual

in his seventies who depends on Social Security and his annuity withdrawals for income, Patteson decided to take advantage of the offer. Gibson annuity (Id. ¶¶ 9, 11.) that the Patteson While preparing Patteson's taxes, had $210,780.29 Group. invested The in an

learned with

Lincoln

Financial

five-year (Id. ¶

surrender penalty on the annuity was about to expire. 10.) broker money.

Gibson informed Patteson that he was also a registered who could help Patteson earn a better return on his

(Id. ¶ 13.)

Patteson stated that his two investment

requirements were principal preservation and not having to pay a fee to withdraw money from any new investment. Acting pursuant to Gibson's advice, (Id. ¶ 12.) on July 5, 2007,

Patteson invested $35,000 in an annuity offered by Defendant 2

Genworth. registered

(Id. ¶ 26.) broker for

Defendant Investors Capital was the the transaction. (Id.) Despite

Plaintiff's instructions and the representations of Gibson and McAdams, the Genworth annuity contained a clause applying a

surrender charge to certain withdrawals. 9, 2007, Patteson invested an

(Id. ¶ 28.)

On August in an

additional

$160,319.78 (Id. ¶ 19.)

annuity offered through Defendant Allianz.1

Once

again, Investors Capital acted as the broker; and the annuity contract contained a penalty for certain withdrawals. 19, 24.) (Id. ¶¶

Plaintiff alleges that neither of these annuities was

a suitable investment for him based on his need for access to all of his retirement funds. Because of these transactions,

Plaintiff "has suffered the loss of having full access to his funds" and has suffered losses because of "severe market

fluctuations." Plaintiff federal cause

(Id. ¶ 30.) filed of suit action on February the 20, 2009, alleging a

under

Securities

Investors

Protection Act ("SIPA"), 15 U.S.C. § 78aaa et seq., and statelaw causes of action under the Tennessee Consumer Protection Act of 1977, Tenn. Code Ann. § 47-18-109, and under theories of negligence, detrimental reliance, conversion, and breach of

fiduciary duties.
1

(Compl. ¶¶ 32-66.)

Plaintiff seeks damages

These two investments total $195,319.78. The Complaint does not state what happened to the remaining $15,460.51 of the original Lincoln Financial Group annuity proceeds of $210,780.29.

3

of no less than $1 million.

(Id. ¶ 32.)

Motions to Compel

Arbitration and to Dismiss are pending before the Court. II. JURISDICTION

Although no party has questioned this Court's jurisdiction to adjudicate Plaintiff's Complaint, it is axiomatic that

"federal courts have a duty to consider their subject matter jurisdiction in regard to every case and may raise the issue sua sponte." Int'l, Answers in Genesis of Ky., Inc. v. Creation Ministries 556 F.3d 459, 465 (6th Cir. 2009) (citation

Ltd.,

omitted); see also Capron v. Van Noorden, 6 U.S. (2 Cranch) 126, 127 (1804) ("[I]t was the duty of the Court to see that they had jurisdiction, for the consent of the parties could not give it."). Plaintiff alleges that this Court has diversity

jurisdiction under 28 U.S.C. § 1332(a)(1) and federal question jurisdiction under 28 U.S.C. § 1331. pending Motions, the Court must Before proceeding with the itself that it has

assure

jurisdiction.

Answers in Genesis, 556 F.3d at 465.

A. Complete Diversity Does Not Exist Patteson's Complaint first alleges that the Court has

diversity jurisdiction over his suit.

(See Compl. at 2 ("The

jurisdiction of this Honorable Court of the matters complained of herein is predicated and founded upon . . . the diversity of citizenship of the parties hereto.") Plaintiff to invoke the Court's 4 In this case, for the jurisdiction, the

diversity

dispute must be "between . . . [c]itizens of different states," and the amount in controversy must exceed the sum of $75,000. 28 U.S.C. § 1332(a)(1). the diversity The Supreme Court has long interpreted to mean complete diversity: no

requirement

plaintiff and defendant may share the same state of domicile. See Strawbridge v. Curtiss, 7 U.S. (3 Cranch) 267, 267 (1806) ("[E]ach distinct interest should be represented by persons, all of whom are entitled to sue, or may be sued, in the federal courts.") (Marshall, C.J.). Here, the allegations of the Complaint demonstrate the

absence of diversity jurisdiction. resident of Memphis, Tennessee.

Patteson states that he is a (Compl. ¶ 1.) Defendant

McAdams is said to be "a Tennessee Limited Liability Company," and Defendant Gibson is a Tennessee resident.2 Because Plaintiff is a Tennessee resident and (Id. ¶¶ 2-3.) at least one

Defendant is as well, diversity jurisdiction does not exist. See Strawbridge, 7 U.S. at 267.

A limited liability company ("LLC") is an unincorporated entity whose citizenship is the same as the citizenship of each of its partners or members. Delay v. Rosenthal Collins Group, LLC, 585 F.3d 1003, 1005 (6th Cir. 2009). Unlike a corporation, an LLC's state of organization and principal place of business are of no consequence for jurisdictional purposes. Id. Plaintiff's statement of jurisdiction is inadequate as to McAdams because it fails to state the citizenship of each member of the LLC. If even one member of McAdams is a Tennessee resident, diversity jurisdiction cannot exist in a suit with a Tennessee plaintiff. See id. The Court need not order an amended jurisdictional statement, however, because the Complaint alleges that Gibson is also a Tennessee resident. (Compl. at 2.) His citizenship alone is enough to destroy diversity. See Strawbridge, 7 U.S. at 267.

2

5

B. Plaintiff's Claims Do Not Arise Under Federal Law Patteson under SIPA, next 15 alleges §§ that 78aaa this et Court seq. has jurisdiction at 2.)

U.S.C.

(Compl.

Plaintiff, therefore, alleges that this Court has jurisdiction under 28 U.S.C. § 1331, which provides, "The district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States." For a suit to must of arise under federal 1) 2) law, law one of three the

preconditions plaintiff's

exist: action;

federal plaintiff's

creates to

cause

right

relief

under state law requires resolution of a substantial federal-law question actually in dispute; or 3) the claim is in substance one of federal law. City of Warren v. City of Detroit, 495 F.3d

282, 286 (6th Cir. 2007). Federal law does not create a cause of action under SIPA. The Supreme Court of has expressly implied held or that SIPA creates See no

private

right

action,

otherwise.

Sec.

Investor Prot. Corp. v. Barbour, 421 U.S. 412, 424 (1975) ("SIPA contains no standards of conduct that a private action could help to enforce, and it contains no general grant of

jurisdiction to the district courts.").

SIPA, instead, "creates

procedures for the orderly liquidation of financially-troubled" brokerage firms. First Fed. Sav. & Loan Ass'n of Toledo v. Fid.

& Deposit Co. of Md., 895 F.2d 254, 261 n.5 (6th Cir. 1990). 6

Under SIPA, the Securities Investors Protection Corporation may file an application with the Court to initiate Id. liquidation Because SIPA

proceedings.

Individual investors may not.

does not contain a private right of action, federal law does not create Plaintiff's right to sue. Plaintiff's suit also does not require resolution of a

substantial question of federal law, and his claim is not in substance one of federal law. Although the Supreme Court has

declined to establish "a single, precise, all-embracing test" for what cases implicate federal issues important enough to

justify jurisdiction under § 1331, it has established certain criteria. Grable & Sons Metal Prods. v. Darue Eng'g & Mfg., 545 Plaintiff has the burden of pleading establish that his "state-law claim

U.S. 308, 314 (2005). facts necessary to

necessarily raise[s] a stated federal issue, actually disputed and substantial, which a federal forum may entertain without disturbing any congressionally approved balance of federal and state judicial responsibilities." Id. Examining Plaintiff's

Complaint, he cannot meet this standard. Plaintiff's sole reference to federal law is his allegation that Gibson's representations to him that the annuities were safe investments that would allow him to withdraw his money at will without penalty "constitute false and misleading statements and deceptive acts as defined 7 in" SIPA. (Compl. ¶ 32.)

However, as noted above, SIPA does not create a private right of action. Barbour, 421 U.S. at 425. More importantly, it is not

necessary for the Court to determine that the Defendants have violated some principle of federal securities law for Patteson to succeed in his suit. See City of Warren, 495 F.3d at 286; cf. Smith v. Kansas City Title & Trust Co., 255 U.S. 180, 200-202 (1921) (finding federal question jurisdiction where plaintiff alleged that defendant could not, under state law, legally

purchase Federal bonds because the Federal Government's issuance of those bonds was unconstitutional). his state-law causes of action for Plaintiff can succeed on negligence, detrimental

reliance, conversion, breach of fiduciary duty, and violation of the Tennessee Consumer Protection Act without establishing that Defendants example, have to violated a provision of federal law. need For only

prove

misrepresentation,

Plaintiff

demonstrate that: 1) the defendant made a representation of an existing or past fact; 2) the representation was false when made; 3) the representation was in regard to a material fact; 4) the false representation was made either knowingly or without belief in its truth or recklessly; 5) plaintiff reasonably relied on the misrepresented material fact; and 6) plaintiff suffered damage as a result of the misrepresentation. Walker v. Sunrise Pontiac-GMC Truck, Inc., 249 S.W.3d 301, 311 (Tenn. states 2008). no Plaintiff's well-pled statute Complaint, or issue therefore, on whose

substantial

federal

8

interpretation his suit's success would turn.

See

Grable &

Sons, 545 U.S. at 313 (noting that it must appear from the complaint that or plaintiff's right of to relief depends law). substantial on the

construction Plaintiff's

application does not

federal a

Because federal See

Complaint

raise

issue, this Court does not have jurisdiction under § 1331.3 id. III. CONCLUSION

The Court, having exercised its independent duty to satisfy itself that it has jurisdiction over the present matter, has determined diversity that or Plaintiff's suit cannot be maintained See under in

federal

question

jurisdiction.

Answers

Genesis, 556 F.3d at 465.

Without jurisdiction, the Court is

without authority to adjudicate the present dispute; therefore, the Court DISMISSES Plaintiff's Complaint. at 127. So ordered this 24th day of February, 2010.
Defendants' assertion that Plaintiff's claims are subject to a binding agreement to arbitrate cannot provide this Court with jurisdiction under the Federal Arbitration Act, 9 U.S.C. §§ 1-307. The Federal Arbitration Act is not an independent source of jurisdiction. It only confers authority to issue a motion to compel arbitration where a district court would otherwise have original jurisdiction. See 9 U.S.C. § 4 ("A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court which, save for such agreement, would have jurisdiction under Title 28, in a civil action."); Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 26 n.32 (1983) ("The Arbitration Act is something of an anomaly in the field of federal-court jurisdiction. It creates a body of federal substantive law establishing and regulating the duty to honor an agreement to arbitrate, yet it does not create any independent federal-question jurisdiction under 28 U. S. C. § 1331 or otherwise.")
3

See Capron, 6 U.S.

9

s/ Samuel H. Mays, Jr. SAMUEL H. MAYS, JR. UNITED STATES DISTRICT JUDGE

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